We all know how important good credit is. Credit card terms, loan rates, housing availability, vehicle leasing eligibility, and gainful employment all depend on your credit score to varying extents. Furthermore, we understand that our country was founded on the ideals of equality, meritocracy, and leaving no one behind. It’s therefore impossible to justify preventing stay-at-home spouses from accessing credit and building the credit standing necessary to thrive in the unfortunate event of divorce or the death of a loved one.
The thing is, our country is also built upon a strong banking system, the health of which is critical to the world economy. It’s therefore also impossible to justify making regulatory changes that stand to weaken the financial viability of banks.
So, uh, how can we even contemplate adopting the rule recently proposed by the Consumer Financial Protection Bureau that would allow credit card applicants to disclose their significant other’s income even when applying individually?
Allow me to explain the flaws in this plan:
- It would make it impossible for banks to accurately account for risk: The crux of the issue is that credit card issuers won’t be able to tell how much of an applicant’s stated income is actually available to pay for a new credit line. Much or all of it could already be spoken for due to debts owed by the applicant’s spouse. For example, an applicant that lists $75,000 in income and $25,000 in debt could be a great candidate if most of the income is theirs to use, but they could also represent a huge risk if they don’t have any independent income and their spouse’s $75,000 is completely depleted given current debt obligations and discretionary expenses. You just don’t know.
- Credit card terms would shift towards average: When banks don’t know which applicant deserves a 15 percent interest rate versus a 5 percent rate, for example, they start giving everyone 10 percent rates. In other words, we’d be creating an unfair system where consumers who deserve worse rates get better rates and vice versa.
- Defaults and bankruptcies would increase: Given the clouded underwriting process, banks will inevitably approve consumers who can’t afford new debt for high credit lines. History shows that these consumers will overspend, become inundated with interest, and ultimately start missing payments. Their own credit standing will decline as a result, and they will face a tougher road to getting approved for credit in the future.
- Banks will weaken: When cardholders default on their obligations, banks don’t get paid back. It’s not just the credit they’ve extended that they’re losing either. They’ve also spent money servicing each defaulted account and engaging in collection efforts. In other words, the CFPB’s proposed rule would cost banks a lot of money, and the result would be less attractive product terms and higher fees for everyone else.
The CFPB’s proposal would be somewhat understandable if there was no other way to provide stay-at-home spouses with an avenue to credit building. But there is. In fact, there are probably numerous solutions that would be preferable to the CFPB’s plan, and here is what I propose:
- Step One: Maintain the current independent income system – The current system, implemented by the Credit Card Act of 2009, requires credit card applicants to display an independent ability to pay with either ongoing income or assets.
- Step Two: Require that all credit card issuers offer joint applications – Joint credit card applications enable two parties to apply for a shared account, for which they both garner full credit building benefits and liability for debt. The critical difference between joint accounts and the type of shared-income application system that the CFPB has proposed is both parties are required to list their income and debt. In other words, issuers would make better approval decisions and no one would be excluded from certain credit card offers just because they’re a stay-at-home spouse.
- Step Three: Waive income verification rules for secured credit cards – In order to get a secured credit card, you have to place a refundable security deposit, usually of at least $200. The amount of your deposit serves as your credit line, ensuring that you won’t overspend and that issuers will get paid back. In other words, there’s no reason to also verify that a secured card applicant has an ongoing independent income stream. By waiving the income requirement for this card segment, any stay-at-home spouse with at least $200 saved up will be able to build credit under their own name.
